Fundsmith Equity ETF (ETFT)

The Fundsmith Equity ETF (ETFT) repackages Fundsmith’s celebrated flagship fund as an exchange-traded product, offering access to Terry Smith’s disciplined, concentrated approach to global stock picking: a portfolio of roughly 30 to 40 exceptional companies held for the long term.

“We’re looking for wonderful businesses at fair prices, not fair businesses at wonderful prices.”

That aphorism — Terry Smith’s articulation of the Fundsmith philosophy — shapes every line-item in ETFT. The fund’s underlying portfolio is not an index. It is a carefully curated collection of global businesses that Smith and his team believe possess durable competitive advantages, excellent management, and strong capital discipline. Fundsmith does not chase growth for growth’s sake; it hunts for companies that can compound value for decades with minimal reinvestment or leverage, the kind of franchises that produce excess cash and return it to shareholders. The universe is small. Fundsmith might identify a thousand candidate companies worldwide that merit consideration; the final portfolio holds around 30 to 40. The typical holding is a multinational business with recognizable brand equity, pricing power, and the ability to grow margins even during economic slowdowns.

By concentrating on so few holdings, ETFT looks radically different from a broad global equity index fund. The top 10 holdings usually account for a third or more of the portfolio. There is no diversification for diversification’s sake. A typical Fundsmith position might be a luxury-goods conglomerate, a software company with high switching costs, a healthcare device maker with a moat, or a financial-services firm with an entrenched market position. The aim is that each holding is a genuinely exceptional business, not a collection of mediocre ones. This concentration is the fund’s defining trade-off: it offers the potential to outperform through superior company selection, but it carries higher volatility and tracking error than a diversified global index.

ETFT wraps this philosophy in an ETF vehicle — the same concentrated holdings as the original Fundsmith Equity mutual fund, but tradeable on an exchange like a stock. For an investor who likes the Fundsmith approach but prefers ETF liquidity and intra-day pricing, ETFT is the bridge. For someone who already owned the mutual fund, ETFT offers no substantive advantage; the holdings, the philosophy, and the expense ratio are essentially identical. For a new investor, the choice between ETFT and the mutual fund is a matter of convenience: do you want to trade it like a stock, or do you prefer mutual-fund mechanics? The underlying portfolio is the same either way.

The active management is the entire point. Fundsmith has a long track record of outperforming global equity indices, particularly during downturns when the concentration in high-quality names proves defensive. That outperformance, if it continues, justifies the expense ratio, which is higher than a passive global index fund. But the fund lives by that philosophy and dies by it too: if Terry Smith or his key deputies depart, the fund’s DNA shifts. If the concentrated portfolio falls out of favour, the fund underperforms and assets may flee. If the world’s valuations shift toward beaten-down cyclicals or speculative growth and away from the “compounders” Fundsmith favours, the fund lags for extended periods. An investor in ETFT is backing a specific investment team and a specific philosophy about what makes a good business, not buying a passive slice of the market.

Research requires understanding Fundsmith’s track record and philosophy. Read the fund’s annual reports to see what businesses it holds and why — the fund’s managers explain their reasoning, and their coherence is either convincing or not. Look at the portfolio’s sector weightings: is it heavily skewed toward technology and consumer staples (where many “compounder” franchises live), or is it more balanced? Check the turnover rate; Fundsmith is not a trader, and annual turnover is typically very low, which minimizes costs and tax drag. Compare the fund’s long-term returns against a global equity index fund: if Fundsmith’s outperformance exceeds its expense ratio, the fund is earning its keep. Understand that concentration means volatility; in any given year, ETFT can swing wildly and lag the index by a wide margin. For someone aligned with the philosophy and patient with volatility, Fundsmith’s simplicity is its strength: own exceptional businesses, hold them, and let compounding work. For someone seeking a passive global portfolio, a traditional index fund is cheaper and broader.